Boeing accurate on pax forecast, missed cargo by 22%: Wells Fargo

July 26, 2016: Boeing’s 1996 20-year Current Market Outlook was an accurate forecast for passenger airplanes but overstated demand for freighters, a new analysis by Wells Fargo Securities indicates.

Aerospace analyst Sam Pearlstein took issue with “skeptics” (notably, Airbus, though Pearlstein didn’t name names) over Boeing’s forecast of greater demand in the small wide-body sector. Airbus believes the number spiked to convince the Boeing Board of Directors that there is demand for the Middle of the Market airplane. Pearlstein notes that Boeing’s forecast “has proven remarkably accurate.”

Checking the 1996 20-Year CMO

“Every summer Boeing updates its Current Market Outlook (CMO), a widely-cited, comprehensive 20-year commercial jet forecast,” Pearlstein writes in a note issued yesterday. “When the 2016 Outlook was released [at the Farnborough Air Show], it showed a shift toward smaller wide-bodies. Some skeptics allege that it conveniently helped support an investment in a new middle market airplane (NMA). However, the track record of prior CMO’s has proven remarkably accurate. We compared the company’s 1996CMO and found that Boeing’s outlook for passenger jets was remarkably accurate, while its estimates for freighter aircraft were far too optimistic.” (Emphasis in original.)

Pearlstein noted that Boeing was almost spot-on over the 20-year passenger aircraft demand from 1996.

“In 1996 Boeing predicted the world passenger fleet would grow at a 3.81% CAGR to 20,820 jets at the end of 2015,” Pearlstein wrote. “In fact, the passenger fleet grew at a 3.79% CAGR to 20,740 units – an impressively accurate forecast. Boeing’s latest CMO forecasts a passenger fleet CAGR of 3.62% through 2035 to 42,230 planes.

“On the other hand, in 1996 Boeing forecasted the freighter fleet would grow at a 3.1% CAGR to 2,260 units. Instead, this market segment expanded at only a 1.9% CAGR to 1,770 freighters,” he wrote. This is a miss of 22%.

“Commonly-cited reasons for this shortfall include: (1) expanded use of passenger wide-body “belly space” for freight; (2) the miniaturization of electronics; (3) “just-in-time” manufacturing systems, where there is less emphasis on delivery speed; and (4) slightly-disappointing global economic growth. The 2016 CMO projects a 2.7% CAGR to 3,010 freighters by 2035.”

Boeing has become slightly more conservative in its 2016 CMO forecast for passenger traffic going forward, Pearlstein notes.

“The shortfall clipped Rockwell Collins’s cash flow during the quarter ended June 30 and breached contractual agreements between the two companies, said Kelly Ortberg, chief executive officer of the Cedar Rapids, Iowa-based equipment maker.” Bloomberg
One says , breached contract terms, Boeing says it adheres to all contracts terms. Who are we going to believe a CEO or a spokesperson?

Not quite
“Rockwell Collins’s third-quarter profit of $1.63 a share beat estimates, analysts on a conference call focused on its disappointing cash receipts”-Bloomberg
Profit per share Ok, cashflow not so Ok

As soon as there is a breakdown in the system, you have an immediate issue and getting the parts t assembly location then would go by air to get the process back in line (as soon as the issue was resolved)

If you follow a trail of parts, they go through multiple countries for bits and parts of assembly before they arrive at the final assembly sight. It can cross and back into a number of countries (Read the book Pacific Ocean, very interesting)

Any minor holdup will cascade so air freight movement would be critical to that working as many of the countries are overseas from each other and or no road or rail links.